There are an endless number of possibilities for creatively purchasing a property.
The biggest problem most new investors face is figuring out how to finance their real estate investments. This is especially true when they want to get into buy-and-hold investments, which is where the real wealth-generating power of real estate investment lies. Do not avoid long-term real estate investments just because you are new to real estate or do not have a lot of capital. Here are four ways all investors can finance buy-and-hold real estate.
#1: FHA Loans
FHA loans are a great place to start for the new investor. The FHA will lend you up to 96.5 percent of the price of a house and at very low rates (although you will have to pay mortgage insurance). Even if the property needs some work, you can obtain an FHA 203K loan to cover the construction costs.
Unfortunately, FHA loans can only be used on owner-occupied properties, but that doesn’t mean you can only use them to buy a home. FHA loans can be used on anything up to a fourplex. That means you could buy a fourplex with only 3.5 percent down and live in one unit while you rent out the other three. That’s a fantastic way to get your foot in the door!
#2: “Buy, Rehab, Rent, Refinance, Repeat” (BRRRR)
The key with this strategy is to try to buy a property to hold at a deep discount, the type of discount you would look for if you were planning to flip the property, then fix it up, apply for refinancing, and hold the property long-term. With a BRRRR property, that extra equity acts as a down payment when you refinance with a bank. Just remember the property must “season” first so the bank will be willing to lend on the appraised value versus the cost you have into the property.
#3: Private Loans
How do you buy a BRRRR property up front before going to a bank to refinance? The best way, in my judgement, is using private loans. If you can find a well-off individual who has their money sitting in a CD making 0.2 percent interest, consider offering them something like 8 or 10 percent interest for a first position mortgage. That person can then lend you the money to buy, rehab, and season the house until you can refinance with a bank and pay off your private lender.
#4: Creative Financing
Motivated sellers are often willing to offer all sorts of creative terms that can help you finance a deal. Some examples include:
- Seller financing
- Selling subject to the existing financing (effectively assuming the mortgage)
- Contract for deed
- Land sales contract
- Lease option
- Master lease option (on apartments)
There are an endless number of possibilities for creatively purchasing a property, although you should work with a lawyer to make sure every transaction is structured legally and correctly to protect you and your seller.
Conclusion: Don’t fall into the trap of thinking you need to be rich to start buying and holding real estate. Buy and hold real estate is probably the best way to become wealthy today, and there are countless ways to finance it.